Voluntary changes in accounting principle are usually disclosed in so-called preferability letters, but occasionally a significant change will be disclosed in an 8-K current report. Last Friday, Bank of America did just that, disclosing that they would be changing their method of accounting for the amortization of premiums and accretion of discounts on fixed maturity securities (ASC 310-20, Nonrefundable fees and other costs) in a current report.
Bank of America’s new accounting method was explained as follows:
[T]he Corporation will amortize premiums and accrete discounts over the lives of the debt securities and then adjust the unamortized premiums and unaccreted discounts based upon actual principal prepayments.
Bank of America explained that the change would more closely align their accounting method with their peers as well as reduce volatility in reported net interest income.
The impact of the change was not disclosed, but Bank of America did say they would release a current report prior to their October 17th third quarter earnings announcement with the financial impact on prior periods. As Michael Rapaport of the Wall Street Journal explained, the financial impact of the change will depend on the direction of interest rates. The change in accounting method will boost “reported net interest income when long-term interest rates rise, and hurt net interest income when rates fall.”
Bank of America was not the first to make a change to their amortization of premiums and accretion of discounts on fixed maturity securities policy this year. CNA Financial Corp changed their method of accounting in February; however, CNA Financial Corp’s change was rather from the method Bank of America will now be using, to the method Bank of America previously used. CNA also accounted for the change as a change in accounting estimate affected by a change in accounting principle, rather than a change in accounting principle like Bank of America.
Following CNA Financial’s policy change, the company received a series of SEC Comment Letters looking for more details surrounding the policy change. The SEC was specifically concerned with the appropriateness of the change.
CNA Financial justified the change as follows:
We deemed it appropriate to analyze our callable debt securities to determine if we met the criteria set forth in paragraph ASC 310-20-35-26 which are:
1) The entity holds a large number of similar securities;
2) Exercise of the call option (prepayments) is probable, and;
3) The timing and amount of prepayments can be reasonably estimated.
It is clear that both Bank of America and the SEC believe the amortization of premiums and accretion of discounts on fixed maturity securities policy is a significant policy for financial companies. Going forward, it will be important to see whether the SEC comments on Bank of America’s change, and whether other financial companies make a similar change to their accounting policy.